Nearly 40% Indian engineering exports driven by SMEs, says EEPC India

Indian SMEs are responsible for about 35-40% engineering exports, said Aman Chadha, chairman of EEPC India.
 

He also threw light on the poor conditions of the engineering players in India and also stressed on the importance of government initiatives to strengthen the presence of these firms at the global level.

 

 

 

What is the role that EEPC India aims to play in India's SME sector?
 

Aman Chadha:  60% of EEPC India’s constituents belong to the MSME sector, which is what the SME is called after the 2006 amendment. Hence, our activities are tailor made for the development of the MSME engineering sector of the country. We suggest progressive policy measures to the government, promote MSME products in exhibitions abroad, hold a wide range of developmental activities to enable our members to gather information on market developments, quality standards, regional trade agreements, publish various journals and information materials for both MSME as well as all our members so that India’s engineering industry and its exports thrive.

 

 

What are the current projects being undertaken by EEPC India?
 

Aman Chadha: EEPC India is participating in about 30 to 35 specific engineering exhibitions all over the world. These exhibitions cater to the 34 engineering segments that we cater to and directly benefit the MSME units belonging to these segments. This apart, we hosted over 80 companies at an India Show in Tokyo, Japan in June 2012 and will follow it up with another India Show at Brno, Czech Republic in September 2012. Over 120 companies are expected to participate at the September show.

 

 

In March 2012, we hosted the India Engineering Sourcing Show (IESS 2012) at Mumbai. This was a grand success and we will follow this up with the second edition of IESS, the IESS 2013 in March 2013, again at the Bombay Exhibition Centre, Mumbai.

 

 

How do you think that the Indian SMEs are performing in the engineering sector?
 

Aman Chadha: India’s SMEs account for about 45% of production and between 35 to 40% of engineering exports. Hence, they are an important component for the future progress of the engineering sector. Our focus is towards technological upgradation of the sector, enhancement of innovation at the work place and the ability to move up the value chain.

 

 

India's engineering exports declined by 10 per cent to $27.81 billion in the first half of the current fiscal. What’s your take on it?
 

Aman Chadha: We must remember that we are now globally integrated and hence if the rest of world, especially, the major markets, are facing acute recession, the impact is likely to be felt on our exports, particularly, engineering exports. So these are on expected lines. I also notice that our exports are suffering in regions like West Asia as also rest of Asia. It is quite possible that turmoil in West Asia is affecting our exports while we need to analysis the data for rest of Asia more closely.

 

 

What are the key challenges faced by the Indian SME sector?
 

Aman Chadha: There are two critical challenges - how to combat technological obsolescence by upgrading technology and access to credit, given the high cost of credit, be it for short term requirements, long term or export purposes.

 

 

Do you feel that government policies (both Centre and state) are working in favour of the SMEs? Are they assisting these companies in alleviating the pertinent issues?
 

Aman Chadha: Given the wide dimensions and problems of the sector, we do believe that some more supportive measures, particularly, with respect to technology upgradation,  affordable credit structures, stable raw material prices and more promotional avenues abroad, can be taken both at the central and state levels.

 

 

What is the outlook for the SME sector in this year?
 

Aman Chadha: Well, as of now things are in the tough phase and hopefully we could be moving up the curve soon.

 

 

In the past, global ratings agencies have cut the outlook for India to negative. Do you think it will impact Indian MSMEs?
 

Aman Chadha: Let me say this that if look around the world, these credit rating agencies will need to downgrade every country, given that we are in the midst of a sharp slowdown. There is certainly a herd mentality among the rating agencies.

 

RBI's move to leave rates unchanged in the monetary policy review has been criticised by India Inc. How do you think it will impact the growth of SMEs?
 

Aman Chadha: I have already raised the issue of high cost as well the lack of access of credit for MSME units, particularly, the tiny units. So the high base rates will hamper the ability of MSMEs to invest, firm up working capital as well as export.

 

 

Kindly share the roadmap of EEPC for the ongoing financial year 2012-13.
 

Aman Chadha: As I mentioned, EEPC India will be participating in about 30 to 35 specific engineering exhibitions all over the world. We also hosted over 80 companies at an India Show in Tokyo, Japan in June 2012 followed by another India Show at Brno, Czech Republic in September 2012. This will be followed by the second edition of IESS, the IESS 2013, in March 2013, again at the Bombay Exhibition Centre, Mumbai.

India's plastic makers in need of level playing field, says Jayesh Rambhia of AIPMA

The Indian plastic manufacturers need level playing field in the current global scenario, as cheap Chinese products have flooded the market, feels Jayesh Rambhia, president of All India Plastics Manufacturers' Association (AIPMA).



 

He also added that plastic packaging increases not just shelf life of food but also prevents wastage. India consumes nearly 12 kg plastic per person every year as compared to the global average of 28 kg.

 

 

 

Although, the consumption is rising at 25% in India but manufacturing is witnessing 5% growth rate.

 

 

 

 

What is the role that AIPMA aims to play in India's SME sector?

 

Jayesh Rambhia: AIPMA has got constant analysis done identifying bottlenecks to growth of SME in plastic sector. It also got strategy study done to work out how we can lead growth into future. Having done this we created master plan for inclusive growth. All above three together form vision for inclusive growth document which is long term plan.

 

 

 

What are the current projects being undertaken by AIPMA?

 

Jayesh Rambhia: Based on above vision for inclusive growth, we started working on factor which need to be addressed to rejuvenate industry.

 

AIPMA is instrumental to get about 1000 acres of industrial land with good infrastructure with single window clearance at affordable rates direct from state governments in Gujarat , Karnataka, MP and UP. We have also worked out a deal with SIDBI to finance our members.

 

We have signed MoU with major plastic associations worldwide,  including US, UK, Italy , European Union to make global opportunities available to Indian plastic manufacturers. To promote export, AIPMA has launched Plastivsion Arabia in UAE & Kenyaplast in Africa.

 

To make latest technology available to Indian entrepreneurs, we have Plastivsion India now in world’s top 10 plastic shows. AIPMA partnered with UNIDO to improve competitive ness of Indian plastic industry.

 

Group purchase agreements from insurance, mobile companies save a bundle for members. We have sent 14 members for training to Italy fully sponsored by Italian government. We also sent 29 members to visit trade fair in Italy.

 

 

 

How do you think that the Indian SMEs engaged in plastic sector are performing in the present global meltdown?

 

Jayesh Rambhia:  Indian market share in US and EU is less than 1% of their total demand.

 

So, global meltdown is not directly responsible for slowdown. Due to taxation with retrospective effect & uncertainty in decision making is preventing large investments to come into India. Many of Indian corporates have declared more projects abroad than in India. This is more responsible for slowdown.

 

Indian growth in consumption is being captured by cheap Chinese imports. They have 25% of market and is growing faster. Much of this import is under invoiced. Result is shelves in Indian chain shops have been captured by Chinese goods.

 

India consumes about 12 kg plastic per head per year against international average of 28 kg.

 

Our consumption is growing at 25% but our manufacturing is growing below 5%.

 

We need to support growth of manufacturing to cater to fast rising Indian consumption.

 

 

 

What are the key challenges faced by the Indian SMEs in plastic sector?

 

Jayesh Rambhia: Free Trade Agreements signed by government makes it cheaper to import finished goods compared to industrial inputs. Government has not generated enough trust and hence they do not get data from SMEs. With no data, SMEs does not get help it needs & deserves.

 

Fragmented short term thinking by government is creating challenge to growth. MNREGA scheme has made availability of workers a major issue in Industry. Power shortage is making it difficult to sustain industry in several states if India. Government has made it compulsory to use jute packaging in agriculture. Such skewed favors does not allow better product to win market.

 

 

 

Do you think that the plastic SMEs are aptly placed for exports?

 

Jayesh Rambhia: In globalised economy, we need level playing field for Indian manufacturers.

 

Price for land, capital, power are much higher in India as compared to China.

 

In India, industry is forced to finance cheaper power to agriculture and consumers. Our tax structure is also higher and we do not get refund of all taxes by export incentives. We are forced to export taxes affecting our export growth. Export of finished goods are losing market share in export basket.

 

However, government does not give more incentives to add value in India. Hence, raw material export is rising. India is behaving like a colony as it is exporting raw material and importing finished goods.

 

 

 

Do you feel that government policies (both Centre and state) are working in favour of the SMEs? Are they assisting these companies in alleviating the pertinent issues?

 

Jayesh Rambhia: Progressive state governments are active to attract industry. More is desired from Center. We have presented several key policy changes which if adopted can change future of our industry. So far, we have not seen any positive action from central administration.

 

 

 

Analysts feel that technology adoption and marketing are key challenges for SMEs. How far do you think it is correct?

 

Jayesh Rambhia: Low spend on R & D is not generating enough intellectual property rights for industry.  Commoditised products do not generate enough margins to support fresh investment. This bears major impact on the functioning of industry.

 

 

 

RBI's move to leave interest rates unchanged in the recent policy review has been criticised by India Inc. How do you think it will impact the growth of SMEs?

 

Jayesh Rambhia: India is importing more than it is exporting. So devaluation of Dollar is increasing our fuel bill and leading to jump in inflation. Devaluation has not helped our export to the extent it is envisioned since prices of many inputs for export are linked to Dollar price. So, plastic raw material becomes expensive when Dollar goes up. So, plastic exporters do not benefit from devaluation.

But due to inflation our wages and input costs go up. That is affecting competitiveness of India as an investment destination. Vietnam, Bangladesh are emerging as new low cost destination for manufacturing. Due to high interest rates, cost of finance goes up further making us non competitive against China.

 

Kindly share the roadmap of AIPMA for the ongoing financial year 2012-13.

 

Jayesh Rambhia: We will continue to work on vision for growth master plan since its a long term plan. AIPMA will keep supporting member each step on the way to growth. We would keep our efforts on areas such as strategy, planning, land, finance, marketing, operations, learning, exports, purchase, training, etc.

We will continue to build bridges between Indian industry and global opportunities. We also bring all stakeholders in plastic industry together for making strengthening India's presence.

Relevance of business plans for small enterprises and entrepreneurs

In current competitive and ever-changing market conditions, it is pivotal for businesses to define their objectives, create strategies, predict growth and also plan for contingencies. In other words, creating a 'business plan' is a must for every company.

 

Regardless of its size, every business initially kicks off with an idea. A well thought-out business plan helps turn that idea into reality.
It is believed that small and medium-sized enterprises (SMES) need to stress on three key elements - product research and development, effective communication tools and also global market.

 

It is very important to understand the concepts, techniques, frameworks and methodologies of creating a business plan.

 

 

 

Understanding the basic purpose of creating a business plan
 

There are two main objectives for chalking out a business plan. The main aim is to access easy funding which is vital for development and growth of business, while the second one is for enhancing strategic and corporate development. A business plan also proves beneficial by guiding an organisation in meeting its targets.

 

It has been found that well-designed business plans offer a functional framework that increases the profitability of any organisation.

 

A well-developed business plan serves the below mentioned purposes –

 

 

 

- Action plan
A business plan has potential of dividing a difficult task of commencing a business into many smaller and less intimidating tasks. It helps businesses to deal with issues in an organised and systematic way.

 

 

 

- Roadmap
A business plan emerges as an important tool to maintain a close watch on the operationality of any company. Business owners often lose sight of the objectives and goals. A business plan not just increases the focus level but also helps in understanding the vision.

 

 

 

- Performance tool
It can carry out evaluation and also to an extent decide the performance of any enterprise/company by fixing realistic targets.

 

 

 

- Business promotions tool
It has often been found that a business plan plays the role of a promotional tool. Although, external financing is needed to increase the functionality of any company, but a business plan can influence the investment sentiment.
 

In order to increase the effectiveness of any business plan, it should be revised periodically. When any sort of trouble comes up, a written business plan can act as a guide for taking calculative decisions. For instance, when deciding a particular action (acquisition or divestment), it is very crucial to have the vision and mission statements documented in the business plan.
 

Just in case, the outcome of the corporate decision does not conform to vision and mission statements, it is very important to understand the merits of proposition and look at the need for adjusting the business plan to meet the targets.

 

General principles to be followed while writing a business plan

 

 

- Increase the readability of a written business plan
A business plan should be well formatted and easy to understand. The introductory statement is considered as one of the most significant sections as it consists the complete summary of the business. Also, the language used to write the business plan needs to be simple so that no questions can be raised on it.

 

 

- Market analysis
A business plan should not be product-driven. One must realise that investors or customers are keen to know about the reaction of the market. It is significant to keep research work handy to demonstrate to the customers what benefits they can draw from the offered products or services.

 

 

- Distribution Plan

A business owner should know how to disburse its products or services. Sufficient knowledge is needed about important aspects such as logistics, warehousing and delivery arrangements.

 

 

- Throw light on uniqueness of business & develop competitive advantages
Speak about the aspects that will increase the competitiveness of any business in the market.

 

 

- Emphasis on management
It is always advantageous to show that the business is managed by well qualified professionals or people who have good work experience. Focus on policies is makes up as an important part of a business plan.

 

 

- Realistic projections
It is important to create a realistic picture and support it with the help of plausible assumptions. Well-validated predictions are impressive. Any business owner should ensure that the projections are achievable in the real world.

 

 

- Developing business plans for specific parties
As every reader varies from one another, it is important to develop different versions of business plan that suit the need. Business owners should understand that bankers or financiers are more interested in stability, security, cash flow coverage and sound returns, while a venture capitalist leverages from high interests. While mentioning about the exit options, it is also important to focus on how the funds will be used.

 

 

- Terms of payback
If the business plan is meant for the potential investors, it is important to show that the funds are secured.

 

 

Different kinds of business plans

 

A start-up business plan is considered as the most standard one as it comprises of topics such as company, product or service, market, forecasts, strategy, implementation achievements, management team and financial analysis. The financial analysis comprises of estimated sales, profit and loss, balance sheet and also cash flow. The plan usually commences with an executive summary and then concludes with appendices, which puts the monthly estimations for the first year.

 

 

- Internal business plans
It has been found that internal plans are not meant for the outside investors, banks or other third parties. It may not consist of detailed description of a company or the management team. It may or may not comprise of detailed financial projections. It may cover main points in slides (such as PowerPoint slides) instead of detailed texts.

 

 

- Operation Plan
An operation plan is known as an annual plan. It would be more detailed in its approach and consist of points such as implementation milestones, dates, deadlines and responsibilities of teams and managers.

 

 

- Strategic plan
It stresses more on high-level options and also fixing main priorities instead of the detailed dates and responsibilities. It won’t comprise descriptions of the company or the management team. The financial projections may not be part of it.

 

 

- New product plan
Also known as growth plan, it stresses on a specific area of business, or a subset of the business. It may not comprise detailed financial projections for the whole firm, but it should at least consist detailed forecasts of sales and expenses for the new venture.

 

 

- Feasibility Plan
A simple start-up plan that comprises of a summary, mission statement, keys to success, basic market analysis and also initial analysis of costs, pricing, and probable expenses.

 

 

Relevance of  business plan

 

Before venturing into any business, it is essential to have a 'business plan'.
A good and comprehensive business plan comprises of information on how to attain easy finance from a lender or financial institutions.
It assumes significance for start-ups and also existing businesses to identify growth opportunities for businesses.

 

 

Why Indian companies need business plans?

 

According to the Alphawise research report from foreign institutional investor Morgan Stanley, India Inc has decided to emphasis on using more of existing capacity rather than establishing greenfield projects.

 

 

The report claimed that one-third of the corporates will be reviewing the de-bottlenecking strategies to bring considerable improvement in productivity and 30% are eyeing to opt for brownfield expansion. One-fifth of the corporates are hopeful that greenfield expansion will take place within a time span of upcoming 12 months.

 

As currently the economic growth of India is facing heat due to the global meltdown, forecasting and planning will be a challenging task for India Inc. Moreover, the Indian businesses will be needing greater resource to resolve the ongoing crisis in today's time.

 

Recently, central government also stressed on the importance of business plan for successful functioning of any enterprise. Union Civil Aviation Minister Ajit Singh said that Indian carriers may not be allowed to acquire any aircraft unless they have a detailed business plan. The recommendation states that the carriers will be needing to offer business plans three years prior before opting for any acquisition.

 

 

Conclusion

 

Since financing acts as a major growth driver for any business, relevance of good and comprehensive business plan assumes greater relevance. Business plans help entities decide well-informed decision on their future.

 

Human Resource Management ensures productivity, maximum success of an organisation

In the midst of lot of competition not only with big organisations but also within small and medium enterprises (SMEs), it is utmost important for small companies to think smart so as to grow and remain competitive within the marketplace.

 

Now-a-days, the human resources are considered as the most essential business driver for organisation. In the wake of cut-throat competition, both in local and global arena, this is a necessity of an organizations to become more adaptable, resilient, agile, and customer-focused to succeed.

 

 

 

Functions of HR in an organisation

 

The success of an organisation is largely dependent on the Human Resource Management (HRM) as hiring well-qualified and competent workforce is the top priority of an organisation and to bring right person on the right job is efficiently managed by the human resource department of an organisation. Besides, bringing up the best-suited workforce on the board, the department also handles issues like retaining valuable employees, maintaining the motivation level of employees, succession planning, making and implementing policies, time management, leave management and many more spontaneous functions.

 

 

 

The department also sets strategies and develop policies, standards, systems, and processes. The major tasks of HR department of an organisation include:

 

 

 

a. Recruitment and selection of best-suited employees – The HR department manages all aspects of recruitment and selection, orientation and training of new employees. While recruiting, HR zeros in all the recruiting tools like types of questions, scoring systems to be used in interviews.

 

 

 

b. Organizational design and development - HR motivates employees to perform well and maintain an organizational culture of high morale. The companies which consider employees as their most valuable assets lay highest attention on human resource department.

 

 

 

c. Employee Relations – HR department of an organisation provides ample training and orientation to the employees to strengthen employee involvement and boost the overall morale of the workplace.

 

 

 

d. Performance, conduct and behavior management – Managing employees' behaviour, conduct and performance also comes under essential functions of HR as talents and accomplishments of company's employees decides company's long-term success and financial performance.

 

 

 

e. Talent Acquisition and Retention – Recruiting and retaining the best employee is essentially important for the growth of an organisation. In every organisation, HR department is responsible for building and managing the systems that recruit, attract, hire, train, motivate and retain a company's best employees. Such porgrammes involves building potent interviewing and screening processes, readying orientation and training and constructing motivating compensation programs.

 

 

 

f. Compensation and benefits programs – Organisation's compensation and benefits programmes were also handled by HR department, this includes offering competitive compensation packages and supervising the pay schedule of the company.

 

 

 

Importance of effective implementation of HR strategy in an organisation The efficacious implementation of HR strategies is highly important for the success of an organisation as the core function of HR is to develop a strong organizational culture and effective management systems. HR professionals are vital in terms of developing the right strategies for organisation and also to identify the out-of-the-box ideas to drive success.

 

Following points should be considered seriously while implementing an HR strategy in an organisation:

 

 

 

HR strategy must be aligned with the organization's strategic vision. Company's current vision should be kept under kind consideration by HR leaders as it will help them to determine ways in which HR activities can support that vision.

 

 

 

The active consideration on demographics of the employees should be another focus area of HR leaders so as to fill the gaps may occur between current skills and the required skills for the organisation growth. The HR staff should bridge this gap via strategic recruitment, retention and training efforts.

 

 

 

Conclusion

 

The HR department of an organisation is considered as the face value as HR not only plays a pivotal role in any organization but it is also important for the candidate as it treats the candidate right from his/her entry in the organization for interview till he leaves the premises of the organization. The department mainly acts as a bridge between the organization staff and the organization (top management).

EXIM Business: A rewarding & profitable opportunity

 Export-import (EXIM) business or international trade is considered as one of the successful commercial trends. This rewarding industry requires a thorough and better understanding of foreign market. Also, proper guidelines are indispensable to set up an import-export business. A well-organized head and a ceaseless attention towards market trend, documentation, foreign exchange aspects and a familiarity of the export policies of the government are quintessential for this business.  

Last month, the multi-lateral lending agency Asian Development Bank (ADB) had sanctioned a $100-million loan to the Export-Import Bank of India (Exim Bank) to fund small and mid-sized enterprises (SMEs) operating in some of the poorer Indian states. The move will not only elevate and boost smaller firms, but will also create thousands of jobs through increased trade. Being instituted in 1981, the state-owned EXIM Bank is involved in promoting India's foreign trade and channelising funds to SMEs or SME clusters to finance goods and services to and from ADB member countries. “Providing longer-term finance to small and mid-sized exporters in Assam, Chhattisgarh, Jharkhand, Madhya Pradesh, Orissa, Rajasthan, Uttar Pradesh, and Uttarakhand should increase trade by $1 billion or more over 10 years and create jobs for at least 50,000 people,” Peter Marro, Principal Financial Sector Specialist of ADB's South Asia Department has said in a release. Before stepping into the EXIM business, an individual must get a better understanding of the commodity one wants to trade.

A thorough foreign market research for the product should be conducted. A mindful and proper consideration should be given to the demand of the product in the international market. The laws and regulations pertaining to International trade and foreign business vary from country to country. So it is also important that the beginner should be fully acquainted with state, federal, and international laws before embarking on an export business.

A. Profitable reasons of exporting   According to the Section 2 (e) of the India Foreign Trade Act (1992), the term export may be defined as 'an act of taking out of India any goods by land, sea or air and with proper transaction of money”.   Exporting not only expands the business penetration but it also reduces the product dependence in the domestic market. Besides, it also provides innovative ideas, enhances marketing proficiency, stirs management practices and instills zeal for global competition.   Forex earning - Foreign exchange (forex) earning is considered as the elementary reason for export as forex not only intensifies exporters' businesses but also improves country's economic conditions.   Reliability - The companies involved in the exporting business are considered as more reliable than their peers on the grounds that the product of exporting company is capable to meet the international standards.   Global trade opportunities – The exchange of ideas with global traders and a better perspective of global culture opens the door of new opportunities in the international arena.   Building new customers – The visit to other countries for selling goods offers an opportunity to the exporter to woo new customers, explore world-class machines and vendors there.  

B. Elementary planning   Ahead of starting an EXIM business, a businessman is required to develop a proper export strategy. Initially, it is required to adopt a simple, applicable and flexible plan of action of exporting which can be easily moulded as per region-specific business sentiments.  

C. International market research   Market research is an integral measure to be undertaken before initiating any new business. Overall, market evaluation process is a prerequisite in the EXIM business considering different political, geographical, economic, legal and cultural factors of the foreign market apart from market characteristics factors like market size, availability of domestic manufacturers among others.  

D. Registration formalities of exporters   A maiden exporter is mandated to be registered with the Director General of Foreign Trade (DGFT), Ministry of Commerce, Government of India. An exporter gets a unique Importer Exporter Code Number or IEC Number by DGFT. The IEC Number is a ten digits code required for the purpose of export as well as import.   In addition, the exporters are also required to get registered with Export Promotion Councils under Indian Company Act. Both Value Added Tax (VAT) and Central Sales Tax (CST) are exempted on the goods exported out of the country and in order to enjoy tax exemption benefit, an exporter is required to get registered with the Tax Authorities.   Similar to export business, import business is also very lucrative business, but it also demands right strategies and a lot of ground-level preparations. The entrepreneurs looking forward for setting up an import business should proceed with a better understanding and knowledge about the international market and foreign market analysis. The import business can be exceedingly fruitful during the periods of unsteady global economy. The merchants who are smart enough to utilize such periods could enjoy a long-term success and profitability from their import business.  

E. Organisations for exporters   There are various organisations and agencies in India working actively to support exporters by providing information on market research in foreign trade.   Export Promotion Councils (EPC) EPCs are non-profit organizations under the Indian Companies Act. Presently, there are twelve export promotion councils are under the administrative control of the Department of Commerce and nine export promotion councils related to textile sector are under the administrative control of Ministry of Textiles.   Commodity Boards Commodity Boards are registered bodies under Ministry of Commerce. The boards are responsible for production, development and export of tea, coffee, rubber, spices and tobacco.   Federation of Indian Export Organisations (FIEO) FIEO is an apex body of Indian export promotion organizations. It is a brainchild of Union Ministry of Commerce and the state industry department. The organization promotes the interests of the Indian exporting community in the international market.   Directorate General of Foreign Trade (DGFT) DGFT is a government organisation and is responsible for the formulation of guidelines and principles for importers and exporters of country.   Besides these prominent organisations, some other organisations are also providing assistance to exporters, namely Indian Institute of Foreign Trade, Indian Institution of Packaging, Export Inspection Council, Indian Council of Arbitration, India Trade Promotion Organisation, Chamber of Commerce & Industry, Federation of Indian Chamber of Commerce & Industry, Bureau of Indian Standards, Marine Products Export Development Authority, India Investment Centre, Director General of Commercial Intelligence Statistics.

Factoring: an alternative option for SMES to access credit

New-age financing mechanisms are often considered as the need of the hour for the credit-starved small and medium enterprises (SMEs) in India. And a trend, which is slowly gaining ground, where the financial service providers are finding it as a lucrative option is factoring services. As the market of SME financing enjoys considerable business opportunity, the new entrants are eyeing to capture the thriving segment.

Market players often say that access to capital is one of the major bottlenecks that impacts the growth of SMEs in India.

Various SME promoters have invested their own funds in fixed assets with the aim to run business effectively. Although, India has witnessed considerable progress in the area of channelising finance to SMEs, but with the ongoing economic slowdown, it assumes significance. Easy access to finance is a prime factor in deciding the competitiveness of the the small businesses in India and this is where the globally practiced tool known as 'Factoring' gains prominence.

Meaning of factoring

Factoring is considered as a type of receivables finance where a company either sells or assigns its accounts (known as invoices) to a finance player (Factor) to bag funding on an urgent basis so that business operations can be continued. It usually comprises of financing short-term receivables, offering credit protection against bad debts, collection of payment proceeds and also management of sales ledgers.

Moreover, it can be differentiated from a bank loan in three ways. Firstly, a bank loan comprises of two parties while factoring consists of three parties such as borrower, buyer and factor. Secondly, the stress is given on the quality of the receivables and not just on company’s credit worthiness. Thirdly, it is considered as an advance on any outstanding invoices.

Can SMEs afford factoring facilities?

Many SMEs ask if factoring is affordable and then the question arises - can a small business survive without using factoring as it is one of the survival tools in the present economic slowdown? All across the globe, factoring is one of the most sought after routes of accessing working capital for SMEs and also for larger organisations.

According to Factors Chain International (FCI), the global factoring turnover for 2010 was at Euro 1648 billion. The overall factoring turnover in India during last financial year 2011-12 touched Rs 19,000 crore, amounting to assets of about Rs 6,000 crore. These figures show that the factoring industry is still is at a nascent stage as it accounts for 0.24% of the banking assets which is lower as compared to the developed countries where it around 3.7%.

Meanwhile, a study by Credit Rating Information Service of India (CRISIL) states that SMEs can strengthen profits by at least 15% if they get payments on time from their big corporate customers. The timely payments from large customers have potential to help SMEs cut interest costs, bring improvement in profitability.

Presence of factoring facilities in India

In 1991, when economic liberalisation programme started in India, Reserve Bank of India (RBI) gave green signal to this facility for SMEs. But, small enterprises suffered due to the absence of adequate knowledge in this regard. But, with changing time, this trend is fading away as two third of the clientele of factoring service providers is now the SME segment and the count is likely to go up further in the coming years.

Factoring has potential to complement the financial supply chain of the clients as it brings improvement in the seller’s cash flow and and cover risks.

Companies offering factoring services in India

Many financial institutions such as banks, mainly foreign players have expressed keenness to foray into the factoring services business.

a) Banks - Foreign banking players like HSBC, Standard Chartered bank, Citibank enjoy some exposure in the business. The banks are foraying into factoring sector as the scope for financing large corporates is reaching to a saturation point. It is better to capture the SME segment as they would pay higher interest rates as compared to the large corporates.

In regard to domestic factoring business, SBI factors, Canbank factor and GTF contribute 90% of the market share, and rest of the share is contributed by the new players.

b) India Factoring & Finance Solutions Pvt Ltd - A joint venture of the state-run Punjab National Bank (PNB), Malta-based FIM BankGroup, Italy- based Banca IFIS, and Blend Financial Services, Mumbai, is slated to start services in cities Pune, Nashik, Nagpur, Aurangabad soon. It is also strengthening its factoring services in Maharashtra for entrepreneurs, small and medium enterprises (SMEs) and small-scale industries.

Presently, India Factoring offers financial solutions to more than 200 SMEs and SSIs in Delhi, Mumbai, Chennai, Bangalore, Kolkata, Ahmedabad and Hyderabad.

While speaking to SME News about factoring services, Sudeb Sarbadhikary, CEO and MD of India Factoring, said, “Factoring services help SME’s in unlocking liquidity from their established trade receivables while enabling them to focus on their core business. The industry has been provided with further impetus after the passing of the Factoring Regulation Act of 2011 wherein the process of assignment, rights and obligations of parties involves and terms of stamp duty exemption have been clearly defined for the first time. This is expected to provide factoring companies further teeth in enabling them to resolve disputes pertaining to collection of debt on factored invoices and is expected to provide a boost to the industry as a whole thus enabling SME’s to further gain under this.”

c) Small Industries Development Bank of India (SIDBI) – This financial institution is focusing on the micro, small and medium enterprises (MSMEs) to create awareness about factoring services among the SMEs.

Understanding the functionality of factoring facilities

A factoring pact for an agreed funding limit is signed, then the funding limit is broken down further for the customers. Thereby approved customers are informed about the assigning of receivables due from them to the factoring company and also they are needed to make direct payment to the factor. The goods/services and invoice to debtor are delivered. Accordingly, invoices are sent to factoring company, which advances up to 85% of invoice as a pre-payment.

After receiving funds, the factoring company waits to get paid by the debtor on the scheduled dates. When the factoring company gets paid, it refunds the remaining amount as the balance paymen.

   

Why factoring is better than traditional lending

- Bank finance needs collateral in the form of mortgage, whereas factoring is decided on the basis of quality of receivables and the buyer profile.

- Factoring is an open account facility and in other words it means that the credit limit rises as sales goes up. The fast growing SMEs who need more and more funding every year, factoring is the best option.

- As factoring is not exactly a loan, this facility offers liquidity and it does not add to the debt of the company.

- Factoring also offers collection services.

How to use factoring services

As factoring is focused on receivables, it is must for SMEs to discuss factoring with their buyers. If the buyer is convinced to pay directly to the factor, then the SME has attained its goal. Proper transaction documents like purchase orders/invoices/ lorry receipt helps in bagging sanction quickly.

Conclusion

If used smartly, factoring provides various benefits for growing SMEs that have rising funding needs. Although, it could be little costlier compared to bank finance, but the benefits have potential to outweigh the cost. It is believed that factoring is best suited for the fast growing SMEs.

Non availability of raw materials, credit crunch putting great pressure on MSMEs' growth, says SGCCI

 Budgetary limitations, skilled labour crunch, technology adaptation and growing competition in market are the major challenges Indian SMEs are often faced with. Government's centralised focus on these areas and wooing industrialists to set up their units in remote rural and tribal areas is a need of the hour, says Rohit S Mehta, Immediate Past President of The Southern Gujarat Chamber of Commerce & Industry (SGCCI), Surat, in an exclusive interview.

What is the role that your association seeks to play in the industry?

Rohit S Mehta: Surat is one of the most progressive cities of India. It has a very strong manufacturing base and the growth is driven by MSME's who constitute almost 95% of the industries activity. SGCCI has all along in its 71 years of existence, catered to the interests of MSME's and will continue to do so. SGCCI is the link between MSME's of South Gujarat and Government.



What is the current scenario of the trade and business among SMEs in Gujarat?

Rohit S Mehta: South Gujarat trade and business are facing challenges. The negative sentiments prevailing at the national and international level are having their toll at the local level. There is an air of uncertainty but we have gone through such situations in the past and we will do so once again this time.



What are the key challenges the Gujarat SMEs are currently facing?

Rohit S Mehta: Non availability and rate of finance, technology adaptation and competition in marketing are the major challenges. The rising dollar is disturbing the equations of even set businesses. Non availability of raw material at the right price is putting great pressure on all industries. Also non availability on skilled and unskilled labour is adding to their misery.



Are the available government policies helping the potential and established entrepreneurs to give fillip to their business?

Rohit S Mehta: Governments are keen to help industries and MSME's by declaring various pro-industries policies. However, they tend to remain only on paper and the benefits are not reaching entrepreneurs. Lack of awareness of these policies is an issue.



Lack of skilled manpower is considered as a key issue for the industry at the moment. What measures should be taken in this regard?

Rohit S Mehta: First of all NREGA is taking a heavy toll on the industry because of easy in availability of money with less effort in their home towns. Also there is a serious mismatch between the need of industry and available man power, with reference to their skills. A serious and rigourous vocational training campaign should be taken up to develop the right type of skilled men power. Also Government should encourage shifting of industries to remote rural and tribal areas to deconcentrate and decongest urban pockets and spread prosperity to rural and tribal areas.



What are the current projects being undertaken by your association for the upliftment of the small traders?

Rohit S Mehta: SGCCI undertakes training seminars and workshops on a regular basis to spread awareness of various government schemes and also update the knowledge of MSME's but our USP is in arranging various subject specific exhibitions for the benefit of Trade & Industry. We organize Udyog for Industry, Vyapar for Trade & Services, Fiber to Fashion for Textiles, Sparkle for Gem & Jewellery, Surat Auto Expo for Automobiles, Women Entrepreneur Exhibition (WEE) to give a platform to women, etc.



What according to you should be the focus area for the government to promote Gujarat SMEs?

Rohit S Mehta: The government should focus on skill development and availability of easy finance. The Centre should also invest in R&D and identify product, and market opportunities for the MSME's to encash because R&D is one area where the MSME's can not enter because of the prohibitive costs. The government should also identify and make available land at reasonable cost to MSME's because in spite of extreme competence, an entrepreneur can not set up a new enterprise by buying land at market price.



What is the importance of technology (ICT) for budding enterprises?

Rohit S Mehta: The best way to do business is to put systems in place. ICT helps entrepreneurs to do exactly that. With ICT they can keep a very good track of their outputs and performance and can take steps to change, alter or modify parameters of performance.



What is the outlook for the sector, especially SMEs, in the next 6 months?

Rohit S Mehta: As I have said earlier MSME's are facing challenges, but they will learn and grow. The next 6 months may be very crucial but if they sustain for this period or up to a year's time, the picture is very good.